Drop Coverage of Jefferies Financial Group Inc. and Vitesse Energy Inc. Effective Immediately

• On January 17, 2023, after the market close, Jefferies Financial Group Inc. (NYSE:GE) completed the spin-off of Vitesse Energy Inc., which now trades on the NYSE under the symbol “VTS”.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Jefferies Financial Group Inc. and Vitesse Energy Inc. effective immediately.
• Our prior estimates and fair values for JEF and VTS should no longer be relied on.

Update MDU and KNF Post-Spin Fair Value Estimates; Maintain Pre-Spin $32 FVE, NEUTRAL Recommendation

•  We are updating our MDU Resources Group Inc. (NYSE: MDU) post-spin fair value estimates to incorporate the most recent company filings, reflecting a slight update to the capital structures and shares outstanding, and MDU retaining 10% of Knife River (KNF) post-spin (our previous estimates indicated up to 19.9% of KNF could be retained by MDU).
•  The separation will be completed on May 31, 2023, after the market close, with shareholders of record as of May 22, 2023, receiving one share of KNF for every four shares of MDU held.
• Shares of KNF and MDU ex-distribution have not begun trading in the when-issued market as of this writing.
•  Our post-spin fair value estimate for Knife River is revised to $32 per share (previously $28 per share) on lower shares outstanding of 56.1 million (previously 63.6 million) arising from the lower post-spin ownership of KNF by MDU.
• Post-spin MDU shares are now fairly valued at $24 per share (previously $25 per share) on the lower ownership position in post spin Knife River.
•  Our pre-spin MDU fair value estimate of $32 per share and NEUTRAL recommendation remain unchanged.
• For more details, please refer to The Spin Off Report dated May 5, 2023.

Drop Coverage of General Electric Co. and GE Healthcare Technologies Inc. Effective Immediately

• On January 3, 2023, after the market close, General Electric Co. (NYSE: GE) completed the spin-off of its Healthcare business into GE HealthCare Technologies. GE HealthCare now trades on the NASDAQ under the symbol “GEHC.”
• GE retained a 19.9% ownership stake in GE HealthCare.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of General Electric Co. and GE Healthcare Technologies Inc. effective immediately.
• Our prior estimates and fair values for GE, and GEHC should no longer be relied on.

Drop Coverage of Fortune Brands Innovations Inc. and MasterBrand Inc. Effective Immediately

• On December 14, 2022, after the market close, Fortune Brands Home & Security Inc. (previously NYSE: FBHS) completed the spin-off of its cabinets business into a standalone, publicly traded company. The spin company adopted the corporate moniker MasterBrand Inc. and now trades on the NYSE under the ticker “MBC”.
• Following the separation, the parent company changed its name to Fortune Brands Innovations Inc., and now trades under the symbol “FBIN” on the NYSE.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Fortune Brands Innovations Inc. and MasterBrand Inc. effective immediately.
• Our prior estimates and fair values for FBIN, and MBC should no longer be relied on.

PAR looks on track to grow recurring revenue in the 20%-30% range (and approach cash flow positivity/profitability) in 2023; conference call commentary suggests multiple potential transactional catalysts could be on the table in the relative near-term   

• Last night, after the market close, PAR posted 1Q 2023 consolidated sales up 25.1% to $100.4 million (versus consensus of $90.1 million) with adj. EBITDA and EPS losses of $8.8 million and $0.46 per share, respectively (compared with the consensus loss estimates of $5.5 million and $0.36 per share, respectively, and prior year losses of $2.9 million and $0.26 per share).
• By segment, Restaurants/Retail segments rose 16.5% to ~$68.6 million while Government segment sales rose 48.5% to $31.85 million, driven, largely, by Counter-UAS task orders (for the U.S. Air Force).
• At the end of 1Q 2023, PAR’s run-rate of annual recurring revenue (ARR) was up ~23% at ~$116 million while total funded backlog at Government rose 105% year over year to $86 million.
• The company ended 1Q 2023 with net debt of ~$300.5 million, including ~$89.5 million of cash and $~$390 million of debt.
• The company does not provide any explicit financial guidance but anecdotally maintained its previous commentary that that ARR would grow 20%-30% in 2023 (while operating expenses are kept relatively flat).
• Financials aside, we note that on last night’s conference call, management commentary seemingly suggested that several transactional-related catalysts could be on the table in the relative near-term, including a sale of the Government business, accretive M&A within the Restaurant segment (that accelerates PAR’s path to profitability) as well the potential for interest in the company from either strategic and/or private equity suitors (see Exhibit #1 on page 2).
• All told, our fair value estimate for PAR is revised to $45 (from $55), reflecting value of $50 per share (previously $59) for the Restaurants/Retail segment, based on a blended 2024E sales multiple of 4.5x (previously 4.8x) and $4 per share (previously $3) for the Government business, based on a 12.5x 2024E EV/EBITDA multiple, and accounting for ~$290.5 million (previously $225 million) of projected net debt (see Exhibit #2 on page 3).

IAC increases 2023E adj. EBITDA guidance; share repurchases ramped during 1Q 2023, reflecting market stabilization as well as management’s view the so-called IAC “stub” is materially undervalued; fair value increased to $72 per share (from $67)  

• Last night, after the market close, IAC reported 1Q 2023 sales down 18% to $1.084 billion, as all business lines experienced softness led by a 23% decline at DotDash Meredith, with adjusted EBITDA growth of ~18% to $9.1 million (compared with $7.1 million in 1Q 2022), led by a return to profitability at Angi.  Excluding certain restructuring, transaction and lease impairment charges at Dotdash Meredith adj. EBITDA increased ~59% to $54 million (versus $34 million in 1Q 2022).
• In terms of the outlook, the company increased its 2023 adjusted EBITDA guidance to $320-$440 million (up from $270-$400 million and ahead of consensus of ~$322 million). By segment, IAC expects $250-$300 million (unchanged) and $100-$130 million (up from $60-$100 million) of adj. EBITDA at Dotdash Meredith and Angi, respectively.  At Search and Emerging & Other, adj. EBITDA is expected to be $40-$50 million (unchanged) and $30-$50 million (up from $20-$40 million), respectively.  Corporate costs are expected to be $90-$100 million (unchanged) while stock-based compensation and depreciation & amortization expenses are projected to be $120-$140 (unchanged) and $340-$380 million (previously $310-$345 million), respectively.
• Importantly, we would highlight that despite the recent share price appreciation, the implied value of IAC’s so-called “stub” has actually remained relatively flat over the last several quarters, which, for context, represents the lowest implied valuation we have seen over the last two years and a material discount to our fair value estimate of ~$3.34 billion (see Exhibits 1 & 2 on page #2).
• Reflective of this reality (as well underlying market stabilization and improved execution) IAC management ramped its share repurchase activity during 1Q 2023 by buying back 3.1 million shares for $158 million or $50.86 per share (with an additional 3.8 million shares under its existing authorization).  The company also invested an additional $104 million in ride-sharing company Turo, bringing its ownership to 31% (from 26.7%) and purchased the land under its NYC headquarters for ~$80 million.
• In terms of valuation, among its private holdings, based on IAC’s guidance and commentary, as well as peer and M&A valuations, we value Dotdash Meredith at $26 per share and Emerging & Other at $10 per share, which awards per share values of $7 and $3 to Care.com and Vivian Health, respectively, while assigning zero value to the other businesses (i.e., Mosaic, The Daily Beast, IAC Films and Newco). Search’s profits are assumed to partially offset corporate costs, while Turo is valued at ~$4 per share. For its public holdings, based on discounted prices of ~$2.40 and ~$40 per share, we value ANGI at ~$11.50 per share and MGM at ~$29.50 per share. Accounting for remaining corporate costs as well as net debt yields a total sum-of-the-parts value of ~$72 per share (with bull and bear cases of ~$94 and ~$45 per share, respectively; see Exhibit #3 on page 3).

Alert: Jacobs to Spin Off Critical Mission Solutions Business

On May 9, 2023, Jacobs Solutions Inc. (NYSE: J) announced its intention to spin-off the company’s Critical Mission Solutions (“CMS”) business into an independent, standalone, publicly traded company. The transaction, which is expected to qualify as tax-free to U.S. investors, is targeted to be completed in 2H F2024 (September FYE) and is subject to customary closing conditions including an effectiveness declaration of a Form 10 filing with the SEC and final approval from the company’s Board of Directors, amongst others.

As the company stands today, J operates under two lines of business: Critical Mission Solutions (CMS) and People & Places Solutions (P&PS). In addition, the company consolidates the results of its 65% majority ownership stake in PA Consulting. In F2022 the company generated $14.9 billion in revenue and $1.6 billion in adjusted EBITDA.

CMS (~29% of revenue and segment profit in F2022) is a provider of cyber, data analytics, systems and software application integration services, and consulting services to government agencies and commercial customers within the U.S. and international markets. Approximately 73% of CMS revenue is derived from the U.S. government, including the Department of Defense, and the Department of Energy, amongst others. The segment generated $4.4 billion in revenue and $424.4 million in segment profit in F2022, representing a 9.7% margin.

P&PS (~57% of revenue and ~56% of segment profit in F2022) provides consulting, planning, science, architecture, design and engineering services to national, state, and local governments as well as multinational and local private sector clients across the world. P&PS focuses on transportation, water, cities &places, environmental, energy & power, health & life sciences, and advanced manufacturing sectors. The segment generated $8.5 billion in sales and segment profit of $823.6 million (or a 9.6% margin).

PA Consulting (~7.5% of revenue and ~16% of segment profit in F2022), via its approximate 4,000 employees, “offers end-to-end innovation, accelerating new growth ideas from concept, through design, development, and to commercial success, and revitalizing organizations, building the leadership, culture, systems and processes to make innovation a reality.” The segment’s customers include a mix of public and private clients that range from global household names to start-ups, and national companies to local public services. The segment generated $1.1 billion and $232.2 million in 2022 sales and segment profit, respectively.

The separation announcement follows the company’s March 2022 introduction of a three-year strategy that identified three key “growth accelerators”: Climate Response, Consulting & Advisory and Data Solutions. From the outside, it would appear that J is separating the CMS business in an attempt to kick start the growth accelerators by focusing on water, environment, energy transition, and transportation, which align into growth areas of climate response, data solutions, and consulting & advisory. CMS on the other hand, will be focused on national priorities such as space, national security, nuclear remediation, and 5G technology, which will provide a stable revenue base with long-term contracts.

In theory the spin-off would result in post separation Jacobs exhibiting higher growth and margins, while CMS will be a leading government services provider. On a pro-forma basis, as a standalone company, CMS would have generated $4.4 billion in revenue and operated with an 8% operating margin in F2022. Excluding the CMS contribution, in F2022 Jacobs would have had sales of approximately $10.5 billion and operated with an adjusted operating margin of approximately 12%.

In terms of valuation, shares of J have largely traded in line with other government services providers, and currently trades at 11.0x the 2024 consensus EBITDA estimate. Non-government focused tech enabled peers generally trade at a higher multiple, albeit in a wide range of 13x to 30x. It appears reasonable that following the separation, CMS would see slight multiple contraction to the lower end of government focused peers while the parent company would see a degree of multiple expansion to represent the higher growth and margin profile post-spin.

Based on management’s commentary on pro-forma F2022 results, and forecasting F2023 revenue growth at levels in line with 1H F2023, and slight improvement in F2024, we forecast CMS generating $382.5 million in EBITDA, and post-spin Jacobs generating $1.4 billion. Applying a 10.0x multiple to CMS, and a 13.0x multiple to post-spin J, on a preliminary sum-of-the-parts basis, we fairly value shares of J at $147 per share when incorporating current net debt and shares outstanding.

SNC posts solid 1Q 2023 results but maintains full-year guidance; further progress was made toward the completion of legacy LSTK projects, which are expected to be significantly less of a drag in 2H 2023; fair value increased to $38.50 per share (from $37.50 per share)

• This morning, before the market open, SNC reported 1Q 2023 consolidated sales up 7.15% to $2.023 billion, including ~10.8% growth to $1.836 billion in the core SNCL Services business. Total adjusted EBITDA increased ~36% to $160.5 million (compared with ~$118 million in 1Q 2022) with professional services & project management (PS&PM, which includes SNCL Services and Capital) posting 34.5% growth to ~$156 million (compared with $112.6 million in 1Q 2022).
• Importantly, the backlog on its legacy LSTK Projects business declined ~$168 million sequentially (i.e., versus 4Q 2023) to $518 million and was down ~46% when compared with $956.6 million in 1Q 2022. The segment adjusted EBIT loss improved to $9 million in 2Q 2023 (as compared with a $31 million loss in the prior year period). The company still expects to “hand over” 2 of the remaining 3 projects to the clients in 2023 (with the final project being completed in 2024); to that end, the company expects to generate positive free cash flow in 2H 2023.
• The company ended 1Q 2023 with net recourse & limited recourse debt of ~$1.45 billion, including $561.3 million in cash and $2.009 billion of debt, and a net leverage ratio of 2.9x (flat versus at the end of 2022). That said, as calculated by SNC’s credit agreement, the leverage ratio stood at 2.5x (compared with the company’s 3.75x covenant).
• In terms of 2023 guidance, the company maintained its full-year outlook, which calls for SNCL Services organic revenue growth of 5%-7% with an adj. EBIT margin of 8%-10%. The Engineering Services subsegment (~60% of consolidated sales) is expected to post an adj. EBITDA margin of 14%-16%. Corporate SG&A and amortization expense are projected to be ~$130 million and ~$90 million, respectively. Based on a capital spending budget of $80-$100 million, SNC still expects to be cash flow negative in 1H 2023 but positive in 2H 2023 (see Exhibit #1 on page 2). Anecdotally, management conceded that assuming current trends remain stable in coming quarters guidance will likely need to be increased looking into 2H 2023. Additionally, the company maintained its longer-term (20222-2024E) guidance (see Exhibit 2 on page #2).
• Our fair value for SNC is increased to $38.50 per share (from $37.50), which assigns value of $46 per share to SNCL Services, based on a blended multiple of ~9.5x, and $10 per share for the Capital segment, wholly comprised of the estimated value of its stake in Highway 407, while accounting for future LSTK losses, corporate overhead and net debt (see Exhibit 3 on page #3).

Liberty Media expects to complete the split-off of The Braves Group into a separate, publicly traded asset-backed equity by the end of 2Q 2023; fair value increased to $50 per share (from $42) on updated 2023E estimates

• This morning, in conjunction with its 1Q 2023 earnings release, Liberty Media indicated that it still plans to complete the previously announced split-off of The Braves Group, including ownership of The Atlanta Braves MLB team, its stadium and The Battery mixed-use development into a separate, publicly traded, asset-backed equity (as opposed to its current multi-class tracking stock structure), by the end of 2Q 2023.
• As previously announced, the transaction is expected to be completed via the redemption of each currently outstanding Series A, B, & C shares for one share in the corresponding common stock of the new Atlanta Braves Group (with all intergroup interests being settled & extinguished).
• In our view, this transaction will reduce complexity and help alleviate the current so-called tracking stock discount as well as facilitate the eventual, tax-efficient monetization of the Braves Group’s assets.
• Additionally, based on updated 2023E forecasts our base case fair value for BATRK is increased to $50 per share (previously $42), reflecting a ~$47 per share valuation for the Atlanta Braves MLB team, based on a 5.5x multiple of 2023E regular season ballpark sales, a $9 per share valuation for the company’s real estate/development assets (i.e., The Atlanta Battery), reflecting a 6.5% capitalization rate on our stabilized net operating income estimate, and net debt of ~$ 5 per share (see Exhibit #1 on page 2).
• For context, our ~$2.895 billion valuation for the Atlanta Braves baseball team implies an ~11.5% premium to the most recent 2023 Forbes valuation of $2.6 billion, which we note represented a ~24% year over year increase from its 2022 valuation of ~$2.1 billion.
• In terms of conference call commentary, the only discussion pertaining to the Braves Group was focused on the current regional sports network (RSN) landscape (following the bankruptcy of the Diamond Sports Group in April 2023). On the topic, Mr. Greg Maffei, Liberty’s chief executive, indicated that the Braves, unlike other teams, continue to receive payments under its current contract, which, in his view, reflects the strength of the Atlanta market and the profitability of its underlying RSN. As such, the company does not anticipate theirs will be a contract Diamond attempts to void during the upcoming bankruptcy proceedings (and even if they did the company thinks it has alternatives that would allow it to “get paid” as well as deliver its product to the fanbase).